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Is there a building boom in the U.S.? It depends on which segment of the construction industry you're looking at.

A surprising array of major U.S. macro indicators — consumer spending, factory activity, corporate profits, and trade — continues to defy expectations of an economic slowdown. And that strength is also fueling a hefty boom in the nonresidential construction market. But good news for the builders of office buildings and schools hasn't filtered through to the economy's one nagging weak spot: the housing market.

Flush times continue for the nonresidential construction industry. Nominal (i.e., unadjusted for inflation) growth in the sector has hovered in the 17 percent to 25 percent range since Hurricane Katrina, with little signs of a slowdown. The boom in the real (adjusted for inflation) spending figures has been nearly matched by an unprecedented explosion in construction materials prices.

What's the implication here? Companies' construction spending is in nominal dollars, so when price pressures finally subside in this booming market—as suppliers eventually deliver larger quantities to buyers — the dropback in prices will probably allow a sustained solid growth path for real spending. Companies should be able to accelerate building plans as acquisition of materials becomes more price-effective.

Supply bottleneck
Indeed, an untold story amid the market's concern over moderating "demand" for residential construction is the likely supply effect of soaring costs for many bottleneck products on the ability of builders to profitably deliver final residential product. The result: Higher prices for key construction materials is likely causing some "crowding out" on the supply side of the housing market, just as demand for new homes is moderating amid cooling price growth and rising mortgage rates.

That's more bad news for the beleaguered housing sector, which is undoubtedly undergoing a significant slowdown, despite the surprising upbeat trajectory of the economic indicators mentioned earlier. The sector has had to deal with a string of mostly negative data reports recently, including another subpar read on housing starts for July.

Price gains have been historically large for the residential sector over the past two years, but without the eye-popping up-moves evident in the nonresidential sector. And clearly, gains for the residential segment are moderating now, unlike the commercial side. Indeed, the "real" level of construction activity for the residential sector is likely to post a hefty 16 percent drop in the current quarter, alongside the 17 percent surge we expect in nonresidential construction for the same period.

This sizable correction in the residential construction market is associated with significant declines in most of the major housing market indicators: housing completions, housing starts, new home sales, and housing permits. The 2006 correction for these key indicators has reversed the excessive boom in the numbers during the 2004-05 period, and allowed these figures, at least thus far, to drop back to the more gradual up-trends evident in these measures through 2003.

Limited impactTo what extent the housing sector correction thus far will stabilize, or continue, likely depends on the path for inflation and Fed policy as we approach 2007, and in either case it appears that residential construction will underperform the broader economy for the foreseeable future.

But it's noteworthy that the negative growth rates in the residential construction market, which constitutes 6 percent of GDP, are being met by even larger positive growth rates for the nonresidential market, as well as strength in the public construction sector, which are each roughly half the size of the residential market. The surprising result, at least thus far: The overall construction sector itself is continuing to operate at levels that are close to capacity, despite the sizable housing sector correction.

In total, the implications of the housing crunch have been limited up until now to mostly a rotation within the construction sector, with limited spillover to the rest of the economy. And with ongoing strength in household and business spending, the degree of slowing in the overall economy is proving notably modest thus far, as well. We continue to expect a moderation of about 0.5 percentage points in U.S. economic growth, from the 3.7 percent rate of the last 13 quarters to growth in the 3.2 percent area going forward.

This slowdown is certainly welcome, given mounting price pressures, but this moderation in growth may not prove adequate to Federal Reserve policymakers as the remainder of 2006 unfolds — especially given their more aggressive internal forecasts of a deceleration to the 2.5 percent area. Even at that diminished level, a growth rate like that would likely sound good to the beleaguered homebuilding sector.